Safaricom Plc - Pricing Power Explained - October 2018
Our 4th Topical Note answers the question “Is Safaricom losing its grip?” This is in direct reference to investor concerns regarding Safaricom PLC’s “Safaricom” declining market share in some of its business lines which in turn has had a negative impact on service revenue growth.
The ultimate concern for investors is that Safaricom’s dominance is under threat and so is its medium to long term financial performance.
We identify the Kenya telecommunications sector as an oligopoly with few players, homogenous products and some degree of pricing power.
The underlying question we wish to answer is whether Safaricom has pricing power in specific business lines; Voice calls, SMS, M-PESA as well as both mobile and fixed data.
This is the first of a 6 part report series on pricing power as we build towards the release of the company’s Half Year financial results on 3rd November 2018.
Pricing power is broadly defined as the ability of a company to raise prices over time without reducing demand for its products.
We use the Herfindahl Hirschman Index (HHI) theoretical framework to determine each business line’s concentration levels.
On the specific business lines, Safaricom has pricing power in the SMS and M-Pesa (mobile money transfer) businesses. Safaricom is fast gaining market share in fixed data and the likelihood of developing pricing power in the long-term is high.
What is clearly evident from recent trends is that voice calls and SMS revenues are under threat not only because of competition but also technological advancements and changing customer preferences.
Declining Voice and SMS traffic over the last one year is an indication of growing preference for Over the Top Services (OTT) because of comparatively lower costs and improved user experience.
To investors, Safaricom’s pricing power or lack of it is of great importance. Not only does it have a direct impact on the company’s market share but also its revenues and overall company profitability.
For the management of the company, the concern will be how to maintain existing or regain lost market share.
Also of concern is how sustainable is the company’s pricing power in the business lines that its holds this advantage. History has shown that pricing power in the Kenya telecommunications industry can be easily eroded. Download Report